Japanification
December 07
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Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:
Dig deeper into these stories in this week’s review.
The US economy delivered solid but slightly lower-than-expected growth in the third quarter, driven by robust consumer spending that has defied expectations of a slowdown. New data this week showed the world’s biggest economy grew at an annualized rate of 2.8% last quarter from the one before, down from the 3% pace seen in the second quarter and slightly below forecasts of 2.9%. Consumer spending, which accounts for the biggest share of economic activity, advanced 3.7% – the most since early 2023, buoyed by the country’s healthy jobs market. This aligns with a separate report this week that showed US consumer confidence hit a nine-month high in October. Contributing further to GDP growth was a significant rise in government spending, which increased at an annualized rate of 5% last quarter.
The GDP report also showed some good news on the inflation front. The personal consumption expenditures price index (PCE) – the Fed’s preferred measure of inflation – rose at an annualized rate of 1.5% last quarter, below the central bank’s 2% target and sharply down from the second quarter’s 2.5% increase. However, excluding food and energy, the core PCE was still up 2.2%. All in all, the report should keep the Fed on track to continue cutting interest rates in the coming quarters, including at their meeting this week.
New data this week showed the eurozone economy grew by 0.4% last quarter from the one before, topping forecasts of 0.2% and marking the fastest rate of growth in two years. Leading the charge was Spain, which saw its economy expand by 0.8% due to a combination of tourism, immigration, foreign investment, and public spending. France, the region’s second-biggest economy, was also a bright spot, with the Olympic Games in Paris this summer helping to boost GDP growth to 0.4% last quarter – double the pace seen in the second quarter.
Even Germany, which has been struggling recently due to a loss of competitiveness in its manufacturing sector, managed to eke out 0.2% growth in the third quarter, defying pessimistic economists who had anticipated a decline of the same magnitude. That unexpected growth allowed Europe’s biggest economy to avoid slipping into a technical recession. However, its performance during the second quarter was revised down from -0.1% to -0.3%. Finally, despite having three more working days than the second quarter, Italy’s economy flatlined in the third quarter.
Moving on, a separate report this week showed inflation in the bloc accelerated more than expected last month. Consumer prices in the eurozone increased by 2% in October from a year ago, up from 1.7% in September and above economist estimates of 1.9%. Meanwhile, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, unexpectedly held steady at 2.7%. Taken together, the faster-than-anticipated inflation numbers and surprisingly strong GDP data could bolster the case for the European Central Bank to lower rates less aggressively. Following the two reports, traders reduced their bets for big interest rate cuts, pricing in a less than 20% chance of a half-point reduction in December. Around a month ago, those odds stood at 50%.
Every month, Bank of America conducts a global fund manager survey to gauge institutional investor’s positioning and latest thinking. And the most recent one, conducted in October, showed that investors have become so bullish that it might be time to sell equities. This surge in optimism – the biggest jump since June 2020 – was driven by the Fed’s interest rate cut, China’s stimulus package, and increasing hopes of a soft landing for the world economy. As a result, equity allocations among the 195 surveyed institutional investors nearly tripled last month, to a net 31% overweight, while cash levels in global portfolios fell to 3.9% in October from 4.2% the month before – triggering a contrarian sell signal on stocks. Since 2011, there have been 11 similar sell signals, with global equities dropping 2.5% over one month on average and 0.8% in the three months following the trigger.
The survey also showed bond allocations in global portfolios dropping by a record amount to a net 15% underweight. At the heart of this bearishness is a big shift in expectations about US monetary policy: traders are reducing their bets on aggressive interest rate cuts since the world’s biggest economy remains strong, and Fed officials have been sounding a cautious tone about how quickly they will lower rates. Adding to the market's worries is the potential for higher inflation and larger fiscal deficits should Republicans win the upcoming US presidential election.
The oil market has been on edge since geopolitical tensions erupted a year ago in the Middle East – a region that produces a huge chunk of the world’s crude. And things escalated further a month ago after Israel vowed a retaliatory attack against Iran. But the widely anticipated strike, which took place last Sunday, avoided Iran’s energy infrastructure, easing fears of a major disruption to oil supplies given that the country accounts for about 3% of the world’s crude production. That sent oil prices plunging on Monday, with Brent – the international oil benchmark – falling as much as 6%, marking its biggest single-day drop in over two years. The US equivalent, WTI, also dropped by a similar amount.
With the Middle East avoiding another flare-up in tensions (for now), traders are shifting their focus away from geopolitical risks to the prospect of a big oil surplus in 2025. See, OPEC+ – the group of the world’s biggest oil-producing countries – has been voluntarily lowering its output since 2022 but plans to gradually unwind those production cuts starting in December. At nearly six million barrels a day, these curbs represent roughly 6% of global demand. Thing is, these production cuts have had minimal impact on global oil output because producers outside the group – particularly in the US and Canada – have been more than happy to make up the difference.
So when you combine increasing oil supply from North America and OPEC+ with weak demand from a sluggish economy, it’s not hard to understand why the market is looking oversupplied next year – and potentially beyond. Case in point: the International Energy Agency warned back in June that the world faces a “staggering” oil glut equating to millions of barrels a day by the end of the decade.
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.
General Disclaimer
This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.
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